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August 29, 2006

Another Tip for Entrepreneurs: On Raising Venture Capital -- You Don't Need Finders!!!

Here's another suggestion for anyone starting a venture and/or seeking venture capital. Be careful about using funding agents or "finders" to help you locate and raise venture capital. These people will often make all kinds of promises about who they know, and what they can do for you, but in fact you usually don't need them, and what's more it's better for your professional development as a CEO to do this yourself. My company, Radar Networks, was approached over the years by several finders. We even tried working with a few before we knew better -- but in the end we raised our capital on our own, without their help. And you can too.

The rest of this article discusses this subject in more detail, and provides suggestions for how to structure a deal with a finder if you still want to use one.

Although I don't recommend it, if you end up working with a finder, do not agree to pay anything up front and do not give
anyone an exclusive on your deal! Finders should ONLY be paid on
contingency based on results. If finders ask for up-front fees, that is a bad sign. It means (a) they are short on cash (ie. they haven't closed deals for anyone else recently), and (b) they are not confident they can close your deal anytime soon. If you have to pay someone to help you raise money -- only pay them after the money is in your account!

In addition another thing to watch out for: some finders will ask for ongoing fees on money you close in
future rounds raised from or via any of their sources and "secondary sources" as well. For example if you close a VC they would ask for a share of any money that is later brought in by that VC. As the saying goes, "Just say
no!" Once a finder has made a first introduction to a source their usefuleness to you is
over on that source; any future funding that comes from that source or
anyone that source knows has little to do with the finder. Some finders will dispute this fact by claiming that their value goes beyond making introductions -- they will say that they help you strategize, negotiate or even close a deal. Don't believe it. In fact,
most venture capitalists and angel investors cannot stand finders and the mere
presence of a finder in a potential deal can serve as a "poison pill" and kill the whole deal. They may tolerate getting introduced by a finder (but only a finder they know and respect and have done deals with before), but they definitely will not tolerate any finder inserting themselves into negotiations.

Another important point for anyone who even after hearing all this
still wants to use a finder: make sure that you have an Exhibit A in
your Finder's Agreement with them, on which all sources they will
introduce to you are agreed to in advance, in writing, before they make the introduction. Your agreement should be structured so
that you must explicitly pre-approve (in writing) any potential
sources before they speak to them on your behalf and you should have the right to remove a source if they haven't made the introduction. Exhibit A should also
have an expiration clause such that for a given source if they don't
get you a meeting within 1 month from the date of adding the source to
Exhibit A then you can approach the source on your own with no further
obligation to the finder. If any finder is unwilling to agree to such
terms then it is likely that they don't really know the sources they are proposing, in
which case they don't add any value over you just approaching those sources yourself.

Also an important word of caution: There are many people out there who call themselves "finders" or who claim they can help you raise money for your venture. Some are real pros and could actually be helpful, others are amateurs, and others are outright professional con-artists and scammers who just want a piece of your cap table and cannot really deliver value. Do your due-diligence before hiring them. Ask them for references to CEO's of deals they successfully raised money for. If they can't give you at least 3 to 5 references to reputable deals they successfully raised funding for in the last year, then they are probably not worth working with. If they do have references, then speak to the CEO's. And note that they may not be willing to say anything negative about a finder (for liability reasons) even if that finder turned out to not be that helfpful -- so basically they will either give you a bare factual review or an exceedingly enthusiastic review. If the review is factual, or at least NOT exceedingly enthusiastic then don't work with that finder. I have met several finders over the years and worked with a few of them -- some were reasonably good, some were ok, some were horrifyingly bad -- but none were great. And I have heard the same from many entrepreneurs who have shared their own stories with me. If I were you, really be careful making this choice. Do your homework before hiring anyone to raise money for your venture.

Even though I would strongly advise entreprenuers NOT to use finders if
they can help it, if someone on your team, such as an advisor (on some
subject other than venture capital) also can help raise money, then
perhaps it makes sense to give them some kind of extra compensation for
that effort. But generally, I prefer to compensate advisors for their
advisory roles, not for finding capital. Finding capital is something
you as CEO should do -- something you need to do directly, not through
an agent. You need to work your network, or grow it if necessary
yourself. And you need to go through the process of pitching VC's
yourself and getting meetings. It's an invaluable learning experience
and will not only make you a better CEO in the long-run, but it will
also give you direct, useful feedback about your business idea and how
you are communicating it.

If your business idea is good you can and should
approach venture capitalists directly. You don't need an intermediary.
Just look them up on the Web and email them (be brief, they have short
attention spans), or go to industry events like TechCrunch, Stirr, and SFWIN,
or pitch to angel groups like BASN, and meet potential investors yourself. Make sure you have a good one sentence elevator
pitch and just try it out. If it doesn't work, ask them to help you
come up with a better elevator pitch. VC's love to think creatively
about business ideas and if you enlist their help or advice they will
usually give it to you very generously. And by the way, when you get a
VC interested enough to start giving you advice that is the first step
to potentially raising money through their fund. It's really that easy.
Most VC's are very approachable and interested in hearing about what's
new. That's their job afterall. You don't need an intermediary.

Comments

I read your article on finder's and found the bilk of the information irrelevant, and not well researched.
I have been a "finder" for a number of years, however, I provide my clients with a full service.
That being defined as - I have copywrited templates for structuring the Business Plan, Executive Summary, One Page presentation, and the investment PowerPoint.
Once all of this work has been acconmplished in a collabrative effort with the Entrepreneur I then will proceeed to target those investors that I know who "play" in the specific field that applies to my client.
This targeted approach has been gained by many years of working with the investment community.

So I find that generalizing usually will get you into trouble and as a result of your arcticle you presumed that all finders are alike.

I think you should present better researched material and inform your "readership" of the true offerings arther than glib assumptions

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In 1999 I flew to the edge of space with the Russian air force, with Space Adventures. I made it to an altitude of just under 100,000 feet and flew at Mach 3 in a Mig-25 piloted by one of Russia's best test-pilots. These pics were taken by Space Adventures from similar flights to mine. I didn't take digital stills -- I got the whole flight on digital video, which was featured on the Discovery Channel.

In 1999 I was invited to Russia as a guest of the Russian Space Agency to participate in zero-gravity training on an Ilyushin-76 parabolic flight training aircraft. It was really fun!!!! Among other people on that adventure were Peter Diamandis (founder of the X-Prize and Zero-G Corporation), Bijal Trivedi (a good friend of mine, science journalist), and "Lord British" (creator of the Ultima games). Here are some pictures from that trip...

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Jim WissnerJim is among the most talented software developers I've ever worked with. He's a prolific Java coder and an expert on XML. He's the lead engineer for Radar Networks.

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